Asian Shares Lower; China's Economic Health In Focus

ShriNavaratnam

SINGAPORE (MarketWatch) -- Asian stock markets were lower Tuesday with some investors selling on concerns of a potential slowdown in China's economy.

Sentiment was initially dented by worries over Purchasing Managers Index data showing that the Chinese economy was still expanding, though at a slower pace than before. Reports about a potential real estate tax trial in China also worried the market.

However, some markets had pared their early losses as the data were digested. Patersons senior private client adviser Chris Blair in Sydney said the concerns were overdone and that the modest cooling in China's manufacturing expansion is a good outcome, while real estate reforms could help lead to sustainable economic growth.

"China wants to slow its economy to sustain it so it doesn't blow up...you can't look at those PMI figures and say some cooling is disappointing, because it shows that their policy steps are working. The market is just jumping at shadows," Blair said.

The Shanghai Composite index was volatile, down 1.0% after briefly crossing into positive territory before the midday break. Hong Kong's Hang Seng Index was down 0.2%, Japan's Nikkei Stock Average was down 0.5%, Australia's S&P/ASX 200 fell 0.6% and South Korea's Kospi Composite was off 0.7%.

Dow Jones Industrial Average futures were down 36 points in screen trade.

Earlier Tuesday, the China Federation of Logistics and Purchasing, said that China's PMI fell to 53.9 in May from 55.7 in April. HSBC's own PMI gauge for China also fell to 52.7 in May from a revised 55.2 in April.

HSBC economist Qu Hongbin said the lower PMI readings "should be seen as positive as it implies that policy tightening is starting to take effect. China's overheated growth is already starting to cool down."

The state-run China Securities Journal also reported Tuesday, citing an unnamed source, that Beijing plans to launch a property tax trial in the provinces of Hunan and Hubei.

Poly Real Estate Group was down 3.0% while Baoshan Iron & Steel was off 1.3%.

The China tax report also hit property shares in Hong Kong with China Overseas Land falling 2.2% and China Resources Land declining 2.3%.

In Seoul, shares perceived as being more sensitive to economic data were lower, taking their cue from the Chinese data, said Lee Kyung-min at Woori Investment & Securities.

Posco was down 2.5%, Samsung Electronics was off 0.9% while SK Energy was down 1.8%.

GS Engineering & Construction was up 5.6% on news a consortium led by French utility GDF Suez, including Siemens and GS Engineering, had won a $1.7 billion contract to build two new power stations in Oman.

Japanese shares were led lower by losses in shippers and commodities-related stocks, while the yen's continued strength against the euro weighed on exporters.

The market in Tokyo was not paying much attention to the unfolding domestic political uncertainty amid calls for embattled Prime Minister Yukio Hatoyama to step down. "Support for Hatoyama has already declined, and even if he does step down, (the ruling Democratic Party of Japan's) policies won't change much," said Yumi Nishimura, deputy general manager at Daiwa Securities Capital Markets.

In Sydney, banking stocks were lower: Westpac was down 2.1% and National Australia Bank fell 1.5%.

Engineering group Downer EDI tumbled 20.3% after disclosing impairments on its Waratah train project of A$190 million, as well as a general impairment of A$70 million.

All eyes were on the Reserve Bank of Australia, which is due to deliver its rate setting decision at 0430 GMT. "While the market is expecting rates to remain on hold, the focus will be on the associated statement," said David Taylor, Market Analyst at CMC Markets. The bank's board will be weighing inflationary pressures stemming from terms of trade and the potential of a housing bubble, against current risks to growth from Europe and China, he added.

Elsewhere in the region, Taiwan's benchmark index was down 0.7%, Singapore's STI was off 0.6%, Malaysia's main index was down 0.6%, Indonesian shares were off 0.7% and Thailand's SET was down 0.2%. Philippines shares were 0.2% lower and New Zealand's NZX-50 was flat.

In foreign exchange markets, the euro was lower against the U.S. dollar and the yen in thin trading, partly weighed by comments from European Central Bank board member Christian Noyer, traders said.

Speaking in Seoul, Noyer said responses by central banks to recent financial crises "have been broadly successful." But, he warned that "steering the economy may prove more challenging and new risks can weigh negatively on the recovery underway."

The single currency was fetching $1.2256 against the dollar, from $1.2301 late in Toronto Monday, and was at Y111.60 against the yen, from Y112.40. The dollar was buying Y91.05, compared with Y91.09.

Lead Japanese government bond futures were up 0.06 at 140.47 points and the 10-year cash yield was down 1.0 basis point at 1.245%.

July Nymex crude oil futures were up 26 cents at $74.23 per barrel. Spot gold was at $1,219.70, up $3.50 from 2115 GMT on Monday.

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